Is the CAPM valid? An Empirical Analysis in USA Stock Exchange

Article Sidebar

DOWNLOAD PDF
Published: 2019-01-30
Authors

Dr. DI Seiorio Fabrizio

DOI: https://doi.org/10.65301/aimt.2019.8.I.II.727
Keywords:
CAPM,beta, risk,return

Issue

Vol. 8 No. I and II (2019): Jan - Dec

Section

Articles
Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

##plugins.themes.bootstrap3.article.main##

Abstract

Quantitative finance was born with the study of the relationship between risk and return. The CAPM is one of the most famous models to estimate the prices of risky assets. It is based on the linear relationship between the excess return and the systematic risk (β). Many studies over the years have analyzed the relationship between risk and return, some of which find weak and inconsistent results. This paper analyzes the CAPM with linear regression, highlighting its limits, and proposes a non-linear model for return estimation. The results obtained from the analysis of the NASDAQ Composite show greater reliability of the non-linear model.

##plugins.themes.bootstrap3.article.details##

References

1. BANZ, R.: The Relationship between return and market value of common stocks, Journal of Financial Economics, Sep. 1981, pp. 4–9.

2. BLACK, F., JENSEN, M., SCHOLES, M.: The Capital Asset Pricing Model: Some Empirical Tests, 1972, pp. 4–7.

3. BLANCO, B.: The use of CAPM and Fama and French Three Factor Model: portfolios selection, Public and Municipal Finance, Volume 1, Issue 2, 2012, pp. 62–63.

4. DI SCIORIO, F.: Dalla Modern Portfolio Theory alla Behavioral Finance: il passaggio evolutivo, Academia.edu, Oct. 2016, pp. 67–85.

5. FAMA, E., FRENCH, K.: The CAPM is Wanted Dead or Alive, Journal of Finance, Vol. 51, No. 5, Dec. 1996, pp. 1947–1958.

6. FAMA, E., MACBETH, J.: Risk, Return, and Equilibrium: Empirical Tests, Journal of Political Economy, Vol. 81, No. 3, May–June 1973, pp. 607–636.

7. GIBBONS, M.: Multivariate tests of Financial Models, Journal of Financial Economics, May 1982, pp. 5–7.

8. LAMONICA, G.: Il CAPM: il caso dell’Italia, Quaderno di ricerca n.256, March 2006, pp. 3–7.

9. MURGIA, M.: La relazione tra redditività-rischio e spessore di mercato dei titoli azionari, Finanza Impresa e Mercato, 1989, pp. 72–74.

10. OZTURK, H.: An Empirical Analysis of the Capital Asset Pricing Model and Beta in Istanbul Stock Exchange. Is Beta Still Alive, 2009, pp. 6–8.

11. PETTENGILL, G., SUNDARAM, S., MATHUR, I.: The Conditional Relation Between Beta and Returns, Journal of Financial and Quantitative Analysis, Vol. 30, No. 1, March 1995, pp. 607–636.

12. ROLL, R.: A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory, Journal of Financial Economics, March 1977, pp. 129–176.

13. ROLL, R., ROSS, S.: An Empirical Investigation of the Arbitrage Pricing Theory, Journal of Finance, Vol. 35, No. 5, Dec. 1980, pp. 1073–1076.

14. SHARPE, W.: Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance, Vol. 19, No. 3, Sep. 1964, pp. 425–442.